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Strategic Management (MGT 501) Lecture 3 Dr Muhammad Mustafa Raziq
Summary of the topics covered in the previous lecture • Characteristics of strategic management and strategic absence • Role of the strategic management professionals (e. g. CEO, line manager, etc. ) • Strategic management conceptual framework (e. g. what it involves, performance, rivals, competitive advantage) • Strategic management process, formulation and implementation
Topics to be covered in this lecture • Strategic management conceptual framework and process • Overarching theories used in strategic management • Tools and techniques in Strategic Management • Analyzing external business environment
1. 6 Conceptual Framework of Strategic Management • Strategic management looks at the following three questions: • Why some firms outperform their rivals consistently? • How do firms generate and sustain superior performance? • What drives strategic action in firms? • The answers to these questions have to be looked at considering the nature of the firm, the industry, and its environment – the answers could be: • The customers trust the firm’s products and services • The customers value the products and services of the firm more than other firms • The firm has a better identity and image • The firm has a better resource base
1. 6 Conceptual Framework of Strategic Management (continued) • The answers to these questions have to be looked at considering the nature of the firm, the industry, and its environment – the answers could be (continued): • • • The firm utilizes resources more effectively The firm has a better structure The firm has a robust strategy The firm has better community support The firm has better systems and processes The firm has better technology The firm has better leadership and employees The firm has better imagination and innovation The firm has better capability
1. 6 Conceptual Framework of Strategic Management (continued) • The insights gained from the answers should be put into a process of imagination to generate creative, innovative idea sets. • This imaginative process is likely to generate ideas about different options, maps, plans, processes, directions, business models, visions, profit formulas, objectives, initiatives and so on. • A holistic picture of this imaginative process may illuminate many potential paths and some paths may appear more attractive than others. • The path with least financial and marketing risks or more benefits or capitalizing on the strengths may be chosen for implementation. • The output of this is a strategy roadmap which is a framework in a firm that creates value, brings out something that the customers want that is different from or better than what others are providing or brings out something new to the market.
1. 6. 1 Strategic Management Process • Strategic management has all the elements of the traditional management functions such as planning, organizing, coordinating, and controlling, it differs with respect to the manner in which these functions are carried out and the objective for which the activities are performed. • The objective is superior performance • The functions are carried out in a means-ends (ways to achieve results) relationship provided by the strategy of the organization. • There is a constant endeavor to analyse the organization's setting to identify threats, opportunities, trends, and patterns in the environment so as to get insights to fine tune or redesign the strategy.
1. 7 Some Theories used in Strategic Management • Resource-based view of the firm • Origin: Edith Penrose (Theory of the growth of the firm) – later works of Warnerfelt and Barney • To achieve sustainable competitive advantage the firm’s resources and capabilities must be scarce and imperfectly mobile. • The firm’s resource base must be valuable, rare, inimitable, and non-substitutable. • Agency Theory • With the separation of firm’s ownership and control the interests of the shareholders and the managers may diverge • The owners (principal) delegate work to the managers (agent) • The owners need to continuously monitor the managers as their goals may not be aligned with each other and the managers may work for their own interests instead.
1. 7 Some Theories used in Strategic Management (continued) • Transaction Cost Theory • This theory explains why firms exist • A transaction cost is a cost incurred in making an economic exchange (cost of participating in a market) • The theory looks at eliminating the costs of using the market (such as costs of organizing and transacting exchanges, trades etc. ) through using the firm – there is an advantage with a firm if production is internalized. • The appropriate governance structure for a given transaction is the one that minimizes the total transaction and production costs
1. 7 Some Theories used in Strategic Management (continued) • Resource Dependence Theory • Theory suggests that firms depend upon each other for resources • Where a firm depends upon resources of another firm there will be a power relationship between the firms such that the firm possessing resources will exercise power over the firm needing resources. • RDT assumes that the ultimate aim of any organization is: • Maximum control over resources and minimal external dependence; and, • Enhance resource control through making other organizations dependent upon own resources (Ulrich & Barney, 1984).
1. 7 Some Theories used in Strategic Management (continued) • Resource Dependence Theory (continued) • Organizations seek to avoid resource uncertainty; to have resources readily available to them as well as avoid resource dependency on others (Fink, Edelman, Hatten, & James, 2006; Hillman et al. , 2009; Nienhueser, 2008). • Due to the power and control factors, where possible, dependent organizations adopt defensive mechanisms (Pfeffer & Salancik, 1978).
1. 7 Some Theories used in Strategic Management (continued) • Behavioral Theory of Strategy • Mental processes are the central behavioural drivers of superior performance • The root of superior performance is in the superior management of select cognitive processes • A cognitive change is needed among strategic leaders to identify distant alternatives • Distant foresight involves mental processes through which invisible opportunities are identified
1. 7 Some Theories used in Strategic Management (continued) • Institutional Theory • This theory considers the processes by which structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior • Institutional theory provides explanation to why firms in an industry develop similarities that provide stability in a population of organizations • Social processes, obligations that come to take on a rule like status in social thought or action • Example: Schools have to maintain the same environment: Regulative (Safe Environment), Normative (Accreditation and Certifications), Cognitive (Teachers and classrooms)
1. 7 Some Theories used in Strategic Management (continued) • Theory of Moral Sentiments • A capitalist system (private ownership) must be based on honesty and integrity; otherwise it will be destroyed. • Self-interest should be moderated by ethics so that purely selfish or exploitative behavior would be the exception and not the rule in society. • Public trust in business and financial markets • Behavioral Theory of the Firm • This theory observes firm behavior as goal seeking and satisfying in a number of utility dimensions • Views learning as the modification of routines in response to feedback from past experiences and the environment.
1. 7 Some Theories used in Strategic Management (continued) • Social Movement Theory • This theory explains the emergent, bottom up processes that occur within organizations • Many organizational changes are instigated by actors who do not normally occupy positions of power or authoritative decision-making capability. • It analyses collective action as a force for change by organizational agents such as shareholders, managers, and employees.
1. 7 Some Theories used in Strategic Management (continued) • Contingency Theory • There is no uniformly best organizational structure for all firms in all circumstances. • The theory suggests that there is no ideal organizational structure. It is rather, • what is appropriate, that is contingent upon the appropriate organizational strategy (Clegg et al. , 1996; Donaldson, 2001). • The way a firm can be organized varies because there are external and internal environmental contingencies (see Hofer, 1975; Morgan, 2006). • The contingency approach, therefore, focuses on a causal relationship, which means the occurrence of one characteristic causes the occurrence of another (Reeves et al. , 2003).
Tools and Techniques in Strategic Management • Managers and policy makers use a variety of tools as they undertake collection of strategic intelligence (investigation), strategic thinking (insight), strategic decision making (imagination), strategy implementation, and strategy monitoring (inspecting). • These include many, for example: • • • SWOT analysis PESTELD Risk Analysis Five Forces Framework ETOP Study Critical Success Factors etc.
Chapter 2: ANALYSIS OF BUSINESS ENVIRONMENT • 2. 1 Analyzing External Business Environment • It is not the firms that compete but their products and services that compete • Whether a firm has high external focus or a high internal focus, their products compete in the market place for buyers’ attention and appreciation. • Market is a place giving opportunities to firms to try out, survive and grow. • 2. 1. 1 Dimensions of Business Environment • Firms develop divisions and departments corresponding to the divisions in the external environment • Finance division works with the financial institutions, money market, and everything to deal with the financial sphere • Production department interacts with the raw material suppliers, customers who purchase the product, research institutions etc.
Chapter 2: ANALYSIS OF BUSINESS ENVIRONMENT (continued) • 2. 1. 1 Dimensions of Business Environment • Similarly firms can interface various external environments for example firms serve local, global and/or internal markets. • There is macro environment (political, economic, social, technological, ecological, legal, demographic) as well as micro environment e. g. industry dynamism. • External environment keeps on changing. Sometimes there are disruptive changes e. g. change in technology, natural calamities, war or political turmoil, natural calamities, new law etc. • External environment includes industries and sectors meeting various needs in society – there are different types of industry sectors e. g. primary, manufacturing and services including various sub categories.
Chapter 2: ANALYSIS OF BUSINESS ENVIRONMENT (continued) • 2. 1. 2 Impact of External Environment on Businesses • External environment impacts firms in multiple ways. • For example, change of a government policy to ban or restrict a product due to its misuse • A new research study concluding that the material used in such and such product is harmful, leading the firm to either withdraw or use alternatives. • Firms would need to continually make internal adjustments with respect to the changes in the external environment.
Summary of the topics covered • Strategic management conceptual framework and process • Overarching theories used in strategic management • Tools and techniques in Strategic Management • Analyzing external business environment
Topics for the next lecture • Levels of analysis: PESTELD framework and ETOP analysis • Environmental scanning and appraisal – strategic intelligence • Competitive environmental analysis: industry and competition • Porter’s Five Forces Model